The SCF market and technology potential in Europe and Italy

An international workshop in Milan last month helped delegates to gain a greater understanding of the potential of SCF and to discuss the impact of new solutions and blockchain technology.

The fourth annual event hosted by Osservatorio Supply Chain Finance of Politecnico di Milano (pictured) took place on 26th October 2016 and was streamed online worldwide.

As Stefano Ronchi, member of the scientific committee of the Osservatorio, said in the introduction, the Osservatorio is at the forefront of applied research and scientific publishing about SCF in Italy, and has been part of the SCF Community since it was founded.

Market potential

The session started with a brief presentation by Federico Caniato, director of the Osservatorio, about the potential of SCF from an international perspective with a specific focus on Italy. The numbers speak for themselves: in the 2010-14 period, the top 7,000 companies worldwide in terms of revenues recorded a net operating working capital (NOWC) increase of about €384bn. As a consequence, the worldwide market for factoring has grown by 11%.

European companies have experienced a reduction in their cash-to-cash (C2C) cycle, which in 2014 was 36 days with days’ payables outstanding (DPO) equal to 65 days. The situation in Italy appears to be particularly critical: C2C is around 20 days but DPO is up to 143 days on average and even higher for government or state entities.

The consequences are easy to understand: a great increase in the value of receivables outstanding in companies’ balance sheets, which in Italy in 2014 reached €572bn. (By way of comparison, Italian GDP that year was around €1.93tn).

This trade receivables figure represents a good proxy for the potential market for SCF. By looking at the receivables volume put through the most common SCF facilities (such as invoice discounting, factoring, reverse factoring), we can see how the potential market for SCF compares with the served market, in four leading European economies (see charts).

The message from this empirical analysis is clear: there are huge growth opportunities for the SCF market, especially considering the potential of innovative solutions.

Demica, a leading fintech company, seems to understand this potential. As Giovanni Lazzeri, Demica origination director and guest speaker pointed out, Demica, a market leader in independent, end-to-end, working capital solutions, has found that critical to its success and growth in recent years has been its international presence, enabling it to manage multi-jurisdiction, multi-currency SCF solutions.

Blockchain: transparency and fraud prevention

The rest of the workshop was devoted to a hot topic within the international financial community: blockchain. In particular, the intersection of blockchain and SCF was the issue addressed by two other international guest speakers, Aljosja Beije (BeScope) and Pepijn Groen (Innopay). Beije talked about blockchain as an innovative payment system enabling transparent, tracked and secure transactions based on the use of bitcoins, and avoiding the need for any intermediary. It appears clear that this disruptive innovation could eventually affect the implementation and processing of SCF solutions, often based on NOWC financing. According to Beije, this promising technology could enable secure trading of receivables, dramatically reducing the back-office paperwork of banks and financial institutions.

Groen talked about the role of blockchain in preventing fraud during SCF solution implementation and reverse factoring in particular. Innopay has always looked for systems and tools that could mitigate the risk of SCF-related transactions. According to Groen, blockchain can enable complete track-and-trace of (factored) invoices and invoice status, preventing fraudulent SMEs from extracting funds from multiple financiers by using the same invoice.

Blockchain is said to be particularly interesting when the following conditions are present: the central authorities are part of the current process or need to be trusted; multiple organisations are involved; information exchange needs to be trustworthy and bears a certain value; multiple jurisdictions are involved; auditability of processes is important; processes have not been automated; ’server up-time’ and redundancy is costly.

The message from the last two speakers was clear: the application of blockchain technology could solve the SCF adoption challenge of enabling traceability and real-time visibility on the status of invoices. So far, the actual application of this technology within SCF programmes is limited but evidence suggests that it will represent a key challenge for the future.

Prof Caniato summarised the event by saying that SCF is going to grow in future years, the market should innovate its traditional offering portfolio and it should exploit the newest technological innovations such as blockchain to propose efficient and effective SCF solutions to the corporate world.